For the Love of Art: What to Consider as You Start Collecting

For many art lovers, locating—and then buying—the perfect piece is about an appreciation for the form, the excitement of going to a gallery or showing and the opportunity to connect with like-minded aesthetes. Rarely does one turn to art an opportunity to turn a quick profit. In fact, in art circles, it’s suggested that an investor should expect to make their money back in five years, and would likely double it in 10 years.

Still, privately-offered investment opportunities like art funds, which collect works with the intent to generate investment earnings, have grown in popularity in recent years, and many potential investors aren’t aware of the risks and costs associated with a burgeoning collection. If you’re considering a foray into the world of collectible art, here’s what you need to know.

Prices are Unpredictable

It’s difficult to gauge what the price a piece will command without listing it for sale with a gallery, auction house or through a dealer. Each piece, even if created by the same artist, may be of a different level of quality or come with a less or more distinguished provenance. Prices can also be determined by how many pieces are concurrently being sold by the same artist or by what period of the artist’s work is currently in vogue.

"A Warhol today, for example, may sell for tens of millions of dollars but was worth just a few hundred in the 1960s."

Art is Illiquid

Art is typically sold in an unregulated marketplace and pieces are worth whatever a buyer will pay for them. Styles come in and out of fashion. Selling when your piece is “of the moment” is desirable, but, when you’re pinched for time, you may not be able to wait for tastes to shift. A Warhol today, for example, may sell for tens of millions of dollars but was worth just a few hundred in the 1960s. Furthermore, if your piece goes to auction and doesn’t meet the reserve you set, you may need to wait several years before offering it for sale again.

It Can Be Expensive to Buy and Sell

Year after year records are broken for the most expensive pieces sold at auction. The top 10 pieces sold in 2015 generated over $1 billion. Aside from the end price, there can be other significant costs associated with the sale. An auction house will charge a buyer’s premium, which can range from 10 to 25 percent of the final bid price. Likewise, a dealer will charge a markup, and a gallery will build a commission into their end price.

The seller, meanwhile, will receive a reduced payment, which is the difference of the sales price minus the commission, markup, or premium.

There Can Be Substantial Carrying Costs

Newly acquired art should be appraised and insured upon purchase. It’s recommended that the owner approach the insurance agent with the appraisal in hand, to avoid any conflicts regarding the value covered. Once purchased, art should be reassessed about once per year, to account for any increase in value.

There are also costs associated with the display. The buyer will need to arrange for shipping, installation and, perhaps, even framing. While the cost of a frame can be significant, the cost of an installation can be substantially higher. There are also taxes to consider, which can be levied at 28 percent—the current U.S. capital gains rate for collectables and antiques—of the piece’s sale price minus the purchase cost.

Still, despite the financial barriers, for many the culmination of an art collection is a labor of love. It’s purchased for the enjoyment of the pieces, for the pleasure of meeting and learning about artists and for the passion inspired when visiting a gallery or showing. In short, buy art because you love it. If it appreciates in value while you own it, consider it a bonus. Always consider buying a great picture and if it’s by a great artist you should see some appreciation along with enjoyment of owning the piece.

The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document. This information is governed by our Terms and Conditions of Use.

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